Why is the long-run aggregate supply curve vertical, and what determines its level?

• A. Because in the long run, output is determined by resources and technology, not the price level; LRAS is vertical at potential output.
• B. Because the price level in the long run is what drives output.
• C. LRAS is always horizontal.
• D. LRAS shifts with money growth.

Answer: (A)

Long-run aggregate supply is vertical because, over time, the quantity the economy can produce (potential output) is set by real factors like resources and technology, not by the price level. When the price level changes, wages and other input costs adjust, so output returns to the same level of potential GDP. The level of potential output is determined by the amount of labor, the stock of capital, and productivity from technology and institutions. Money growth and price changes influence demand and prices, but they don’t change the economy’s capacity to produce in the long run. Only shifts in resources or technology move the vertical LRAS curve left or right: more resources or better technology raise potential output; fewer resources or weaker productivity lower it.